A blue-chip shares rally that kicked off the last full week of pre-Christmas trading has proved short-lived as investors succumbed to more jitters over US monetary policy.

While decision makers from the US Federal Reserve embarked on two days of discussions on the future of America's asset purchase programme, global markets erred on the side of caution.

The FTSE 100 Index was 36 points lower at 6486.2, having rallied by more than 80 points on Monday due to hopes for no change in the Fed's $85 billion a month quantitative easing scheme.

IG market analyst David Madden said traders were squaring up their positions ahead of the Fed announcement.

He added: "Investors know they were lucky to avoid a trimming of the bond-buying scheme in September and now they are not taking any chances, especially after yesterday's rally."

Markets in France and Germany were down even more sharply, while on Wall Street the Dow Jones Industrial Average drifted into the red too.

On currency markets, the pound was off a little at $1.63 and €1.18 after official figures showed inflation in November dipped to a four-year low making the prospect of monetary policy tightening seem further away.

But the data had only a small impact as it was made clear that recently announced major energy price hikes had not yet taken effect in the figures.

In London, supermarkets dominated the fallers' board as industry data revealed how the major players were continuing to lose out to discounters Aldi and Lidl.

Sainsbury's dropped 16.9p to 378.6p, Morrisons was off 7.7p at 256.7p and Tesco slid 6.5p to 324.5p.

Meanwhile, car insurer Admiral was also on the way down after the Competition Commission unveiled plans to shake up the motor insurance market. It is concerned that contracts between price comparison websites and insurers often require the same price to be offered for an insurer's product across the market, thereby reducing competition. Admiral, which owns car insurer Elephant and comparison website Confused.com, fell 28p to 1233p.

Aviva said the watchdog's plan to allow the at-fault insurer to take greater control of the claim was something it had wanted for many years. Its shares were 0.7p higher at 421.1p.

In corporate news, PC World and Currys owner Dixons Retail fell 5%, or 2.6p, to 48.7p in the FTSE 250 Index as investors booked profits following a run that has seen shares quadruple in the past two years.

The biggest FTSE 100 risers were RSA Insurance up 2.3p to 92.4p, Sage Group up 7.3p to 382.3p, and Mondi up 14.5p to 960p. The biggest fallers were Sainsbury's down 16.9p to 378.6p, Petrofac down 43p to 1110p, and Morrisons down 7.7p to 256.7p.